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At the Beyers household, we've had three Keurig brewers since Christmas. Each of them has failed multiple times. The newest one, which shipped direct from Keurig less than a week ago, has already failed twice this in the past 24 hours.
Fixing the brewer isn't easy. As the Keurig reps I've dealt with over the past two months explain it to me:
First, bend a paper clip. Remove the K-Cup holder. Stick the sharp end into holes in the needles inside the machine. Rotate to remove loose grounds. Wash the cup holder. Return it to the brewer. Close it up. Try brewing pure water to cleanse the system. Repeat at least twice.
For me, jury-rigging in this manner coaxes at least one extra cup of delicious coffee out of the brewer. But if history holds, even this band-aid will fail at some point. This is our third brewer, after all.
And that's important; I'm one of many having trouble with a Keurig brewer. Higher-than-expected warranty expenses reduced Green Mountain Coffee Roasters' (Nasdaq: GMCR ) first-quarter gross margin by 230 basis points.
The picture gets worse when you look at it in terms of real dollars:
|Keurig division sales||$345.1 million||$212.0 million|
|Warranty reserve balance||$17.7 million||$1.7 million|
|Warranty reserve as a % of division sales||5.1%||0.8%|
Source: SEC filings.
Pretty stark, eh? The rise appears to be at least partly due to a rise in the types of problems customers are experiencing. Here's how Chief Financial Officer Fran Rathke addressed the issue during the first-quarter earnings call:
"Last year, fiscal '10, starting in our fiscal Q2, we had a very different type of issue with primarily the B70 where it manifests itself very quickly. So the consumer would buy the brewer and within a week or two after using it, there was an issue with the component ... What has happened last quarter, and now much more predominantly this quarter we're seeing, is what we're calling a later-stage issue with a family of reservoir brewers, where months and months later after they own the brewer, they're -- not in a consistent way, but in some of the brewers, they're having some issues, we believe, tied to a component." [Emphasis added.]
We own the B70. All three of our machines have suffered the first issue, including the one we just received directly from Keurig. No wonder warranty reserves are through the roof. Problems with the B70 have persisted for almost a year now.
This isn't what you want to see when you're betting on a stock that, at 26 times forward earnings, is trading with huge expectations. Wall Street's target is 30% annual profit growth over the next several years. Warranty problems could get in the way of Green Mountain's growth trajectory.
Quality problems have a way of crimping growth. But don't take my word for it. Look at AT&T. The carrier has taken to discounting to keep customers frustrated with its network performance from fleeing to Verizon now that Big Red is carrying the iPhone.
Or better yet, look at Toyota (NYSE: TM ) . Recalls have plagued the automaker even as Ford has reestablished itself as the top U.S. carmaker and in the process become a relative beacon of quality in an industry that badly needs a standard-bearer.
For Green Mountain, quality problems come at the wrong time. Starbucks (Nasdaq: SBUX ) this week signed a deal to bring single-cup brewing to as many as 500,000 hotel rooms. Longer term, the coffee king could develop its own Keurig competitor, Smart Money reports.
I'd be among those tempted to try Starbucks' brewer if one were forthcoming, if only because I've become addicted to the single-cup style. Single-cup brewing is tasty, convenient, and I suspect cheaper. (No more wasted half-pots of coffee.)
Having said that, I'm also intent on giving Green Mountain Coffee Roasters every chance to fix its problems. Every encounter with Keurig staff has been pleasant. I've received free coffee for my trouble. Our replacement brewer was sent via priority shipping. I've detected no lack of willingness to make my experience better, only the means to do so. But a design problem is still a problem, and it needs fixing. Fast.
Now it's your turn to weigh in. Please let us know what you think about Green Mountain's warranty issues, the stock, and whether you'd buy now using the comments box below. You can also rate Green Mountain Coffee Roasters using the comments box below.